'India must have a contingency plan if US defaults on debt'

October 03, 2013 18:58 IST

India must have a "contingency plan" in place to ring-fence the country's economy if the political showdown in the US leads to a default on its international monetary obligations, industry body Assocham said.

"As of now, the indications suggest there is a prolonged battle while there are only two weeks left for the US to get a Congressional approval for raising its debt ceiling of $16.7 trillion," Assocham President Rana Kapoor said.

A divided US Congress is fighting over a budget for the fiscal year that began on Tuesday and an hike in the debt ceiling by October 17, when the Treasury Department will otherwise breach its authority to borrow the money required to cover the nation's existing obligations.

If the US is pushed into a default of its international obligations, the ripples would be felt all across the world. Consequently, it would be in the fitness of things that different wings of Indian government prepare a Contingency Plan to ring-fence our economy, Kapoor added.

The different wings of the government include the Finance Ministry, Commerce Ministry, the Prime Minister's Office, Planning Commission, Reserve Bank and market regulator SEBI.

"The most important factor would be to ensure our foreign exchange reserves do not deplete and we keep foreign institutional investor (FII) inflows intact," Kapoor said.

A default by the US on its debt obligations is likely to cause runaway rise in gold prices as panicky investors would then rush to safe havens, even as they would scamper for exiting from the US bond market.

"Fortunately, Indian banks do not have much exposure to the American treasury markets. However, as a result of global shakeout and panic that may follow, we may face huge pressure on crude oil and other commodities like gold which India imports in large quantity," Kapoor said.

Meanwhile, the political impasse in the US Congress over budget showed no signs of easing as the first meeting between President Barack Obama and lawmakers since a budget deadlock shut wide swaths of the federal government failed to yield any result.

The US government closed non-essential operations on Tuesday after Congress failed to strike a deal on spending and budget due to differences over 'Obamacare', the signature healthcare programme of President Obama. Republicans and Democrats are blaming each other for the impasse.

The shutdown has left nearly 800,000 employees on unpaid leave and closed national parks, tourist sites, government websites, office buildings, and more.